Phoenix Suns fans learned a lesson in life the hard way in the sixth and final game of the 1993 National Basketball Association championship series with the Chicago Bulls.

Leading by two points with seconds remaining, the Suns expected Chicago to play for the tie that would send the game into overtime.

But the Bulls had other ideas. They took the three-point shot that won the game and the league title.

While I shared the disappointment of Suns fans everywhere, there is an important lesson in this: Success comes to those who know when to take risks and who manage those risks well.

It's a Part of the Business

This is something that successful bankers have always known. As Federal Reserve Chairman Alan Greenspan said in a recent speech, "Banks are in the business of managing risk."

Risk cannot be abolished. Nor should it be. Risk is an essential ingredient for a vibrant, creative, growing economy. As Chairman Greenspan added, "There is a systematic, positive correlation between risk-taking and potential reward."

Housing finance and portfolio lending have changed a great deal in recent years. It's a more complex and riskier business than it used to be.

A Raft of Risks

Not only are portfolio lenders subject to traditional liquidity risk; they face other risks as well, including interest rate risk, funding risk, price risk, mortgage prepayment risk, and counterparty risk.

It's especially important for portfolio mortgage lenders to handle risk effectively at this point in the economic cycle. Currently, they enjoy strengthened balance sheets, highly liquid asset compositions, and a recovering economy.

Managed properly, those strengths will enable institutions to thrive in spite of the many financial, economic, and competitive challenge they will face as the marketplace changes in the 1990s.

To manage these risks successfully, managers need to make good use of the tools that are available for identifying, evaluating, and mitigating the risks of the marketplace.

And one of the most valuable risk-mitigating resources available to housing and community lenders today is the Federal Home Loan Bank System.

The system was created in 1932 specifically to support housing by addressing the liquidity risk of mortgage portfolio lenders.

Lender of First Resort

As the House Committee on Banking and Currency noted at the time, "It is the purpose of this home loan bank bill ... to function as a reserve system, supplying short-time and longtime funds" to institutions engaged in home financing.

As such, the bank system is a lender of "first resort," offering credit products that a financial institution can use day-to-day to manage and enhance its housing finance activities.

What was true at the bank system's inception remains valid today. By raising funds in the capital markets, the bank system is a ready source of funding for housing lenders.

And thanks to the system's triple-A credit rating, the cost of those funds is as low as the market will allow, at times only a few basis points higher than rates for U.S. Treasuries of comparable maturities.

The bank system continues to mitigate the liquidity risk faced by portfolio lenders. What has changed is the structure and diversity of credit products offered by various Home Loan banks. These products are designed to help member institutions deal with the other risks that hamper housing finance.

Other Options

Individual bank products include asset-matched funding, prepayment hedges and put options, and "on call" advances. Home Loan bank letters of credit are also valuable tools for members, and among other things, can be used to manage counterparty risk when funding mortgage transactions through the capital markets.

Depending on their size and strategic focus, members of the Federal Home Loan Bank System will make use of different risk-management tools offered by their district banks.

But the bank system offers something for every member, whether state or federally chartered, stock or mutually owned, in an urban or rural area, with less than $1 million in assets or more than $40 billion in assets.

The bank system is keenly aware of the need to manage its own risks. Since it is a cooperative, its customers are its members and stockholders.

And because it's a government-sponsored enterprise, it is careful not to expose the American taxpayer to potential loss. Thus the Home Loan banks are in a perfect position to help institutions identify risks and risk management strategies that will work for them.

By using the system to address the unique risk management issues they confront, institutions of all sizes can smooth their earnings stream and maintain the value of their franchise - which strengthens their ability to support housing in their communities.

In the process, they can prove that in business - as on,the basketball court - the issue isn't how to avoid risk, it's how to turn that risk into success.

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